Select Committee on European Communities Seventeenth Report


Memorandum from HM Treasury


  1.  The Government welcomes the Committee's report as a contribution to the public debate on Agenda 2000. It is being taken into account in formulating the UK's position for the Berlin European Council on 24-25 March, which should resolve the Agenda 2000 negotiation. The following paragraphs set out the Government's observations on the Committee's opinions, as expressed in the Report's summary.


  2.  The Government strongly agrees with the link which the Committee has drawn between Own Resources and EC expenditure issues. It is grateful for the Committee's support in its attempts to ensure that spending in the EU as currently constituted should by 2006 be stabilised at

85 billion (at today's prices), and concurs with the Committee that co-financing could be used "to help stabilise total EU expenditure". The stabilisation of expenditure is important both as a means of moderating the largest net contributions to the Budget, and in order to ensure that enlargement is affordable within the 1.27 per cent of GNP ceiling on own resources. Stabilisation is consistent with both full CAP reform and a fair outcome for all member states on structural policies. Stabilisation does not, of course, imply "cuts" in structural spending but a maintenance of its aggregate value in real terms at the same level as in the present period.


  3.  The Government agrees that scrutiny of EU spending should be rigorous. The spending of sums of the order of 1 per cent of GNP is plainly a matter worthy of substantial and continued debate. The Government invest significant resources in scrutinising EU spending through the processes of the Council and official committees, in co-operation with like-minded member states. It also welcomes the role which the UK Parliament plays in scrutiny.

  4.  The Government notes the Committee's views on transparency in respect of what UK taxpayers contribute to the EU, and what they are paying for. It agrees that such transparency is important. The Government publishes an annual White Paper on European Community Finances[12]. Estimates of net contributions are published in the Financial Statement and Budget Report and other general public spending documents more detail is given in the Annual Report of the Chancellor of the Exchequer's Departments. Most EU spending in the UK is undertaken through UK Government Departments: the Annual Reports of those Departments explore such spending in the same way as domestically financed public expenditure. The Government provides additional information to Parliament, for instance in the form of explanatory memoranda. The Government will continue to publish a wide range of information on EC spending.


  5.  The Government reaffirms its view that there are many non-financial benefits and costs of EU membership. Equity does not require equality of net contributions. But it does require inequalities in those contributions to be fair and justifiable in the context of differences in prosperity.


  6.  The Government acknowledges the problems of fraud in respect of own resources. It continues to press for improved systems which reduce these. But it agrees with the Commission[13] that

    "The shortcomings of the system . . . do not by themselves provide grounds to justify an urgent modification of the Own Resources Decision."

  7.  Measures on the expenditure side of the EU budget (notably the structural and cohesion funds) attempt to ensure that member states' prosperity is taken into account in the distribution of EU finances. As has been noted in discussion of the UK abatement, these measures do not fully achieve the desired result there are significant discrepancies between the patterns of national income and net contributions. But the Government agrees with the Commission that the resolution to these discrepancies should be found on the expenditure rather than the revenue side of the budget.

  8.  The possible use of GDP instead of GNP in own resources has not been an issue in the present negotiations. The Government has, however, noted the Committee's consideration of the issue.


  9.  Even with the abatement the UK remains one of the largest net contributors to the EC Budget. Without it the UK's contribution would be so wholly excessive, having regard to the UK's relative prosperity, as to be unfair. The Government fully endorses the Committee's view that "without the abatement, the UK would remain one of the largest net contributors, and we agree that some way of remedying the situation would need to be found" (paragraph 16). That is as true now as it was at the time of the Fontainebleau agreement.

  10.  The Committee suggests that there may be better ways of resolving the UK's net contributions problem, "through the savings of a reformed CAP and a stabilisation of expenditure overall by 2006, and possibly through increased EU expenditure in the United Kingdom" (paragraph 18).

  11.  Addressing these proposals in turn, the Government submitted written evidence to the Lords during the course of the inquiry, which explained why CAP reform is unlikely to reduce greatly the UK's net contribution compared with that of other Member States. CAP reform will reduce the amount spent on intervention prices, but the amount spent on direct aids to farmers will rise. The Government cannot, therefore, predict with any confidence that CAP reform will have a significant effect on the UK's net contribution.

  12.  With regard to stabilisation of expenditure: this would be beneficial to all the large net contributors. However, the benefit to the UK would be reduced by the abatement which works as a corrector mechanism so that the UK gets only one third of the benefit which it would otherwise receive. Therefore stabilisation would only produce modest gains for the UK, in comparison with other large net contributors.

  13.  Turning to the Committee's suggestion of increasing EU expenditure in the UK, a massive redistribution of spending would be required in order to remedy the difficulty and to make the abatement unjustified or unnecessary. There has never been any prospect that Agenda 2000 would deliver a redistribution of anything like this order. Stabilisation does not improve the situation: it only prevents it getting worse.

  14.  Accordingly, the Government will maintain the UK abatement, as the only viable means of ensuring that the UK does not face an unfair net contribution. This is wholly consistent with both ambitious reform of the CAP, and enlargement to central and eastern Europe, both of which will benefit all member states.


  15.  As the Committee rightly says, co-financing and CAP reform are independent concepts. Co-financing would not affect either the benefits to farmers from the CAP or the total amounts paid by member states towards it: it affects only the distribution of those amounts. In that context it should be noted that any reductions in EC spending would be matched by increases in the demands on member states' domestic finances. The Government's view is that co-financing must not be allowed to increase the aggregate burden of the CAP on member states. The Government would therefore not accept any EC spending reductions arising from co-financing as relevant to the stabilisation of the EC budget.

March 1999

12   Latest edition: Cm 3937 (April 1998). Back

13   Own Resources Report, page 36. Back

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